European emissions trading: the cap that does not fit

Markets that trade carbon pollution permits are meant to cut emissions. So why did the carbon dioxide vented in 2010 under Europe's scheme go up?

Fog in Sarajevo, January 2011: traffic and the low-quality coal used for heating create smog during warmer winter days. Coal also adds to greenhouse gas emissions, but European countries like Bosnia and Herzegovina are not EU members, so remain outside its ETS. Photograph: Elvis Barukcic/AFP/Getty Images

The latest analysis from Bloomberg New Energy Finance shows that last year, carbon emissions from the energy, steel, concrete and manufacturing facilities in the ETS rose by an estimated 1.8%. Yes, rose, not fell.

I think carbon trading schemes are necessary as part of efforts to reduce greenhouse gas emissions and limit climate change. But to work, the cap on emissions has to be tight enough. The reason emissions rose in 2010 compared with 2009 was that emissions had fallen hard from 2008-2009 (11%) and 2007-2008 (5%). So there was room last year for emissions to grow, as the economy recovered a little, without hitting the cap.

As it stands, Sandbag's Damien Morris tells me that no country in the EU will have to cut its carbon until at least 2015. Sandbag's analysis shows that the entire 2008-2012 ETS period (phase two) is likely result in no carbon being cut, at all. On the contrary, some spare pollution permits will probably be carried over into the next phase.

I agree with the UK's energy secretary, Chris Huhne, that Europe has to increase its ambition, to a continent-wide 30%. Some may argue that allowing businesses to make use of the looseness of the carbon cap as they recover from the recession makes perfect sense. But that is only the case if you believe that high-carbon businesses have a long-term future.

If you think a low-carbon future is inevitable, then banking the carbon cuts caused by the recession and thereby redirecting investment to develop sustainable activities, such as renewable energy, is the only sane choice. If not, I'm sure China will be very happy to sell us the technology when we realise we need it, rather than vice versa.

Footnote: If you want to post comments below like "the ETS is corrupt and broken – time to cash in", or "quick, fill your boots before they close down this scam!", then feel free. The ETS has been appallingly badly run. But for the sake of clarity, do please say whether you think carbon emissions need to be reduced at all. If you do, please say what your alternative to the ETS is. I am away for much of tomorrow, but will dive into the comments later.